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Monday, November 22, 2010

Why RPP Infra Projects IPO is Racing to Oversubscription

The enhanced retail investment limit of Rs. 2 lakhs is clearly helping RPP Infra Projects IPO to getting oversubscribed by at least a few times. But a closer analysis shows that this is not the only reason, as both HNIs and Corporate Investors are subscribing to the Issue strongly.

By the close of the second day itself, the retail portion was subscribed 107%, showing that retail investors are taking fairly strongly to this IPO, probably also on the enhanced retail investment limit by SEBI. RPP Infra is the first IPO to benefit from this development.

The overall subscription level of 76% by the end of second day is also fairly good, as this clearly shows a race to being oversubscribed by at least a few times.

The Non Institutional Investors segment has also shown surprising response to RPP Infra IPO, having subscribed 292% of the portion reserved for them. The fact that both Corporate Investors and High Networth Individuals (HNIs) fall in this segment bodes well for this IPO, as on the listing day, these are usually the segments clamouring for the scrip if they have missed out on the Issue. And with nearly thrice oversubscription in this segment, such rush for the share is likely on the listing day.

Now the question is why an average infra company’s IPO is garnering this much retail, corporate, and HNI support.

One reason is that the RPP Infra IPO is fairly priced, and not overpriced. What this means is that if the management guidance of 51% topline growth in FY’11 is indeed realized, investors can expect the scrip to reasonably appreciate within the next two quarters itself.

Secondly, though the infra space has underperformed in recent quarters, it is one of those rare sectors in India’s capital markets where valuations can be stretched to a significant degree. For example, out of the 65 listed infra players, around 16 are trading much above RPP Infra’s asking P/E of 19, which is also around the industry average of 20. Even after cancelling out the exceptional cases, we can find around 10 infra players commanding valuations between 25 and 50.

With RPP Infra Projects growing for the last five years at a CAGR of 28.73%, there is no reason why it can’t command such an above average P/E in the coming years, especially if its BOT forays and expansion to overseas markets like Sri Lanks pans out as planned.